Castrol India Limited : An attractive bet at cmp of Rs 132 Target price :Rs 165

Castrol is a leading international player in lubricants in all major categories such as automotive, industrial and marine & energy applications in the highly competitive and fragmented lubricants industry comprising of national oil companies ,IOC,BPCL,HPCL, several international majors, Shell, VEEDOL and a large number of local companies such as Gulf Oil, Savita oil etc. Castrol is a well known brand and leader among all other companies.

Demand for automotive lubricants is driven by the usage of vehicles in the country while the growth in the market in recent years has been due to the rapid expansion of vehicle population. Demand for industrial lubricants has been observed to have a strong correlation with the Index of Industrial Production (IIP), which is largely driven by economic activity. In case of marine & energy lubricants, the demand drivers are global and local ship movements, which facilitate large - scale movement of cargo and goods. The installed base of offshore rigs along the coastline of India and their uptime drives demand for energy lubricants.

Demand for lubricants experience a dip due to slowdown in industrial production & auto sales in 2019 which also got reflected in financial performance of FY 2019. However the demand is likely to grow with economic reforms and growth in Indian economy which should help Castrol to improve performance in future.

Key Positive factors:

1.        MNC company stock available at PE multiple of 16-17

2.        Very High ROE 64

3.        High dividend yield 4% at CMP132

4.        Consistent dividend paying company  

5.        Debt free company

6.        >75% profit is distributed as dividend to shareholders.

7.        Leader in Sector with well established brand.

8.        Premium pricing power being a leader.

	2019-E	2018	2017	2016	2015	2014
Revenue	3800	3,904.60	3,851.50	3,370.40	3,298.00	3,392.30
Other Income	65	84.3	83.7	87.3	95.9	48.1
Total Income	3865	3,988.90	3,935.20	3,457.70	3,393.90	3,440.40
Expenditure	-2769	-2,834.90	-2,819.70	-2,365.50	-2,403.20	-2,675.60
Interest	-1.1	-1.1	-1.2	-1.5	-0.8	-2.4
PBDT	1094.9	1,154.00	1,115.50	1,090.70	989.9	762.4
Depreciation	-65	-55.6	-45.5	-45	-39	-36.1
PBT	1029.9	1,098.40	1,070.00	1,045.70	950.9	726.3
Tax	-270	-390.1	-378.2	-370.8	-335.7	-251.8
Net Profit	759.9	708.3	691.8	674.9	615.2	474.5
Equity	494.6	494.6	--	247.3	247.3	247.3
EPS	7.65	7.16	6.99	13.65	12.44	9.59
NPM %	19	18.14	17.96	20.02	18.65	13.99

Risk Factors :

1. Recession in auto and industrial sector could effect the performance of company
2.Strong competition with local companies selling at comparatively cheaper rates.

Technically stock seems to be bottomed out at 113 .Auto no.s saw improvement in last 2 months and going forward Auto seems to be coming out of slowdown.Reduction in corporate taxes should help company to improve net profit in spite of lower revenue for the year. I f we look at immediate listed peer company Gulf oil enjoys a PE multiple of 20 & Castrol being a MNC is available at PE multiple of kust 16-17.Going forward a small increase of 5% in EPS next year and PE expansion  to 20 could take this stock to( EPS:8x20=160)  Rs 160 a dividend of Rs 5.5 would result a minimum 25% returns in one year.

Long term investors can safely invest in this excellent MNC company with a target price of Rs 165 in a year.

Update: The stock reccommendation was done before break out of COVID pandemic financials of company may get affected due to unprecedented locked down thu affecting the given target price.

For research based mutual fund advisory investors may contact me at my wapp no. 8130911019 www.investandearn.org